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Why Icahn Acquired a Controlling Stake in Ferrous Resources

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Recapping and looking ahead

We have divided our An In-Depth Look at Icahn Enterprises’ Segments and Strategies series into two parts. In the first part, we analyzed Icahn Enterprises’ stock performance and movement. We also discussed its Investment, Energy, Automotive, Metals, and Real Estate segments.

In the second part of this series, we’ll look at Icahn Enterprises’ (IEP) Mining, Railcar, Home Fashion, Food Packaging, and Gaming segments. We’ll also discuss the factors that led to Icahn’s high dividend yield and its major risks. We’ll wrap up the series with a discussion of Icahn’s valuation techniques and recommendations.

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About Icahn’s mining segment

On June 8, 2015, Icahn Enterprises (IEP) acquired a controlling stake in Ferrous Resources. The stake was acquired through a tender offer to purchase any and all of Ferrous Resources’ outstanding shares. This deal totaled $180 million, which is ~$0.36 per share. Prior to this offer, IEP owned 14% of Ferrous Resources’ common stock. On December 31, 2015, IEP’s stake stood at 77%.

Ferrous Resources has certain rights to iron ore resources in Brazil. It also has significant iron ores assets in the states of Minas and Bahia in Brazil. Esperança, Santanense, and Viga are mines located in Minas. Gerais is already extracting and producing iron ore while the other assets are in an early stage of exploration.

Ferrous Resources has iron ore assets that are in an early stage of development. According to the company’s management, this acquisition could help improve Icahn’s shareholder value.

Low costs: Key for the iron ore industry

The iron ore industry is highly competitive and has a high level of market concentration. Ferrous Resources competes with large international players such as BHP Billiton (BHP), Vale (VALE), and Rio Tinto (RIO).

Icahn Enterprises’ management notes that the larger players have financial muscle as well as the advantage of scale in terms of resources. This helps it acquire additional exploration rights over iron ore deposits, further adding the advantage of scale to its business.

This helps the company reduce costs such as those for logistics, allowing it to price its product more competitively. In turn, this increases competitive pressure on small players.

Iron ore market outlook

Iron ore production is expected to increase globally due to the consistent increase in capacity. Iron ore growth is expected to be driven by the global steel demand. The steel demand may pick up in 2016, primarily led by the developed economies.

Investors interested in trading in iron ore companies can look into the iShares MSCI Brazil Capped ETF (EWZ) and the SPDR S&P Metals and Mining ETF (XME).

In the next part, we’ll explore whether Ferrous Resources is making a profit.

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